Maximize Your Retirement with Senior Financial Services Inc - Annuities in Retirement Planning (FIA’s effect on Sequence of Returns) Part 5

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What is Sequence-of-Returns (SOR)Risk?

• Sequence-of-Returns risk refers to the order in which investment returns occur in retirement.
• Early negative returns (e.g., a market drop in the first few years of retirement) can dramatically reduce portfolio longevity, because retirees are withdrawing funds while the market is down.
• Even if the long-term average return is fine, bad early years can deplete savings faster than expected.

Example:

• Portfolio starts with $1,000,000.
• Retiree withdraws $50,000 per year.
• Market drops 20% in the first year → remaining balance is $950,000 × 0.8 = $760,000
• Withdrawals continue → the portfolio may be depleted much faster than if the same losses happened later.

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    How FIAs Help Mitigate Sequence-of-Returns Risk

     Guaranteed Minimum Return

• FIAs typically offer a guaranteed minimum interest rate (often 0–1%).
• Even if the market index drops, the principal does not decrease, preventing withdrawals from eroding capital during bad years.

     Market Upside Participation

• FIAs allow participation in market gains through index-linked crediting strategies, often with caps or participation rates.
• This lets retirees benefit from positive returns without exposure to market losses, smoothing growth over time.

     Optional Lifetime Income Rider

• Some FIAs offer a Guaranteed Lifetime Withdrawal Benefit (GLWB) or similar rider.
• Provides stable income regardless of market performance, decoupling withdrawals from portfolio fluctuations.

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    Practical Illustration

Scenario	Traditional Portfolio	FIA with Lifetime Income Rider
Portfolio Value	$1,000,000	$1,000,000
Market Loss Early Retirement	-20%	0% (principal protected)
Withdrawals Year 1	$50,000	$50,000 guaranteed from rider
Portfolio After 1 Year	$760,000	Still $1,000,000 (or close, minus fees)
Effect on SOR Risk	High	Significantly reduced

FIAs shift the risk of early negative returns from the retiree to the insurance company. Even if the market drops early, the retiree’s guaranteed withdrawals or minimum account value are preserved.

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    Key Points for Retirees

1. FIAs smooth returns — protects principal in early retirement years when withdrawals make SOR risk most damaging.
2. Lifetime income riders can provide predictable cash flow even in bad market years.
3. Caps and participation rates limit upside compared to direct market exposure, but the tradeoff is risk mitigation.
4. FIAs work best as part of a diversified retirement income plan, especially for retirees who cannot tolerate large early losses.

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    Bottom Line

• Sequence-of-returns risk is one of the biggest threats to a sustainable retirement portfolio.
• FIAs mitigate SOR risk by:
• Protecting principal from market losses
• Providing guaranteed growth or income
• Allowing market participation without downside exposure

They are not a replacement for growth assets, but are a tool to stabilize withdrawals and ensure retirement income longevity.